The Union Budget: Concepts, Deficits, FRBM, Approach and Broad Trends for RBI Grade B Finance
Last updated: 2026-11-13 · MockMentor
"The Union Budget: Concepts, approach and broad trends" is a line of the General Topics unit in the RBI Grade B Phase 2 Finance syllabus. It overlaps with the ESI chapter on the Economic Survey and Union Budget, which covers the priorities of each year's budget. This chapter focuses on the concepts that Finance questions test: the constitutional basis, the three funds, revenue and capital accounts, the types of deficit, the FRBM framework and the shift to a debt anchor, and the types of budgeting. It ends with the broad trends of recent budgets.
In one line: the Union Budget is the government's annual statement of estimated receipts and expenditure under Article 112; it is judged by its deficits, the quality of spending and the path of debt, and India has moved from a fiscal deficit target to a medium-term debt-to-GDP anchor, with the fiscal deficit budgeted at 4.3% of GDP for 2026-27.
Basic concepts
- Budget: the "Annual Financial Statement" of estimated receipts and expenditure of the government for a financial year, presented under Article 112 of the Constitution. The word "budget" does not appear in the Constitution.
- Fiscal policy: the use of government spending, taxation and borrowing to influence the economy.
- Revenue and capital: revenue items are recurring and do not create assets or liabilities (taxes, salaries, interest); capital items create assets or liabilities, or reduce them (borrowing, loan recovery, building roads).
- Deficit: the excess of expenditure over receipts, measured in different ways.
- Fiscal consolidation: reducing the deficit and debt over time.
- Financial year: 1 April to 31 March in India.
Why in News?
- The Union Budget 2026-27, presented on 1 February 2026, set the fiscal deficit at 4.3% of GDP, down from 4.4% in 2025-26, and gross market borrowing at a record ₹17.2 lakh crore.
- The budget put the central government's debt at about 55.6% of GDP for 2026-27, on a path to the medium-term target of 50% (plus or minus 1 percentage point) by 2030-31.
- Capital expenditure for infrastructure was raised to about ₹12.2 lakh crore, continuing the focus on public investment.
- The Income-tax Act, 2025 came into force on 1 April 2026, replacing the 1961 Act, and the GST rate structure was simplified to two main slabs of 5% and 18% from 22 September 2025.
Constitutional provisions
| Article | Provision |
|---|---|
| Article 112 | The President shall cause the Annual Financial Statement to be laid before both Houses every year |
| Article 113 | Procedure for estimates: charged expenditure is not voted on; other demands are voted by the Lok Sabha |
| Article 114 | Appropriation Bill, to withdraw money from the Consolidated Fund |
| Article 115 | Supplementary, additional or excess grants |
| Article 116 | Vote on account, votes of credit and exceptional grants |
| Article 117 | Special provisions for financial bills |
| Article 265 | No tax shall be levied or collected except by authority of law |
| Article 266 | Consolidated Fund and Public Account of India |
| Article 267 | Contingency Fund of India |
| Article 280 | Finance Commission |
Three funds of the government
| Fund | Content | Parliamentary approval |
|---|---|---|
| Consolidated Fund of India | All revenue receipts, loans raised and loan repayments received; all expenditure is met from it | Withdrawal needs an Appropriation Act |
| Contingency Fund of India | An imprest of ₹30,000 crore placed at the disposal of the President for unforeseen expenses, to be replenished later | Advance without prior approval; later regularised |
| Public Account of India | Money held by the government as a banker or trustee, such as provident funds, small savings and deposits | No approval needed, as the money is not the government's |
Charged expenditure
Some expenditure is charged on the Consolidated Fund and is not voted by Parliament, though it may be discussed. It includes the salaries of the President, the Speaker, judges of the Supreme Court and the Comptroller and Auditor General, interest and debt payments, and amounts needed to satisfy court decrees.
Components of the budget
Receipts
| Revenue receipts | Capital receipts |
|---|---|
| Tax revenue: direct taxes (income tax, corporation tax) and indirect taxes (GST, customs, excise) | Borrowings: market loans, treasury bills, external loans, small savings (through the National Small Savings Fund) |
| Non-tax revenue: interest receipts, dividends and profits (including RBI surplus), fees, fines, grants | Recovery of loans given by the government |
| Disinvestment and other non-debt capital receipts |
Net tax revenue of the centre is gross tax revenue minus the states' share, which is decided on the recommendation of the Finance Commission.
Expenditure
| Revenue expenditure | Capital expenditure |
|---|---|
| Salaries, pensions, interest payments, subsidies, grants to states (even if used for assets), defence revenue spending | Building roads, railways, defence equipment, buildings; loans to states and PSUs; investment in shares |
| Does not create assets for the centre | Creates assets or reduces liabilities |
Since 2017-18, the budget no longer divides expenditure into "plan" and "non-plan", after the Planning Commission was replaced by NITI Aayog. It now uses "centre's expenditure" (central sector schemes and establishment) and "transfers" (centrally sponsored schemes and Finance Commission grants).
Types of deficit
| Deficit | Formula | What it shows |
|---|---|---|
| Revenue deficit | Revenue expenditure − revenue receipts | Borrowing used for consumption rather than investment |
| Effective revenue deficit | Revenue deficit − grants for creation of capital assets | The part of the revenue deficit that does not create any assets |
| Fiscal deficit | Total expenditure − (revenue receipts + non-debt capital receipts) | Total borrowing needs of the government |
| Primary deficit | Fiscal deficit − interest payments | Borrowing for current needs, excluding past debt |
| Monetised deficit | Part of the fiscal deficit financed by RBI's net credit to the government | Money creation; inflationary |
| Budget deficit | Total expenditure − total receipts (old concept) | No longer used in India after 1997 |
Example
Suppose a government has revenue receipts of ₹30 lakh crore, non-debt capital receipts of ₹1 lakh crore, revenue expenditure of ₹37 lakh crore, capital expenditure of ₹11 lakh crore and interest payments of ₹12 lakh crore.
- Revenue deficit = 37 − 30 = ₹7 lakh crore
- Fiscal deficit = (37 + 11) − (30 + 1) = ₹17 lakh crore
- Primary deficit = 17 − 12 = ₹5 lakh crore
Quality of deficit
A deficit used for capital spending (roads, power, railways) adds to future growth and can pay for itself over time. A deficit used for revenue spending adds to debt without creating assets. That is why economists watch the ratio of revenue deficit to fiscal deficit and the share of capital expenditure.
Fiscal responsibility framework
FRBM Act, 2003
The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2003 and came into force in 2004. It required the centre to:
- Eliminate the revenue deficit.
- Bring the fiscal deficit down to 3% of GDP.
- Stop borrowing directly from RBI in the primary market from April 2006.
- Present three statements with the budget: the Medium-Term Fiscal Policy Statement, the Fiscal Policy Strategy Statement and the Macroeconomic Framework Statement.
The targets were paused after the 2008 crisis and again during COVID-19, using escape clauses.
N. K. Singh Committee (2017) and the 2018 amendment
The FRBM Review Committee chaired by N. K. Singh recommended a debt anchor: general government debt of 60% of GDP (40% for the centre, 20% for states) by 2023, with the fiscal deficit as the operational target, and escape clauses for national security, war, calamities and sharp falls in growth, limited to 0.5% of GDP. The FRBM Act was amended in 2018 to adopt the debt target and to drop the revenue deficit target.
The current approach
After COVID-19 pushed the fiscal deficit to 9.2% of GDP in 2020-21, the government followed a glide path, reaching below 4.5% in 2025-26. From 2026-27, the budget uses debt-to-GDP as the main anchor, aiming to bring central government debt to 50% (plus or minus 1 point) of GDP by 2030-31. A debt anchor gives flexibility year to year while keeping debt sustainable.
State finances
States follow their own FRBM laws, usually with a fiscal deficit limit of 3% of their gross state domestic product, with extra room linked to power sector reforms in some years. The central government gives states interest-free loans for capital expenditure under the Special Assistance to States for Capital Investment scheme.
Types of budgeting
| Type | Feature |
|---|---|
| Line-item budget | Lists spending by items, such as salaries and supplies; traditional |
| Performance budgeting | Links spending to activities and results; recommended by the Administrative Reforms Commission (1960s) |
| Outcome budget | Measures outcomes of schemes, such as the number of children vaccinated, not just spending; India introduced it in 2005 |
| Zero-based budgeting | Every expenditure must be justified afresh each year, starting from zero |
| Gender budgeting | Shows allocations for women; India has published a Gender Budget Statement since 2005-06 |
| Green budgeting | Tracks spending with environmental effects; some states publish green budgets |
| Participatory budgeting | Citizens help decide local spending |
| Balanced, surplus and deficit budgets | Receipts equal, exceed or fall short of expenditure |
Budget process
- Preparation: the Budget Division of the Department of Economic Affairs collects estimates from ministries from around August and September; pre-budget consultations with stakeholders.
- Presentation: since 2017, on 1 February, so that it can be passed before the financial year begins; the railway budget was merged with the general budget in 2017.
- General discussion in both Houses.
- Scrutiny by Departmentally Related Standing Committees.
- Voting on demands for grants by the Lok Sabha, with cut motions (policy cut, economy cut, token cut). Remaining demands are passed together by the "guillotine" at the end.
- Passing of the Appropriation Bill, which allows withdrawal of money from the Consolidated Fund.
- Passing of the Finance Bill, which gives effect to tax proposals. It is a money bill, so the Rajya Sabha can only recommend changes within 14 days.
Interim budget and vote on account
- Vote on account: an advance grant for part of the year, under Article 116, until the full budget is passed.
- Interim budget: presented in an election year by the outgoing government, covering estimates for the full year, with the full budget later presented by the new government.
Budget documents
The main documents include the Annual Financial Statement, the Demands for Grants, the Appropriation Bill, the Finance Bill, the Memorandum explaining the Finance Bill, the Receipt Budget, the Expenditure Budget, the Budget at a Glance, the Key to Budget Documents, the Outcome Budget, the Statement of Fiscal Policy and Macroeconomic Framework under the FRBM Act, and the Budget Speech.
Broad trends in recent budgets
| Trend | Detail |
|---|---|
| Focus on capital expenditure | Central capital spending rose from about 1.7% of GDP before COVID-19 to over 3% of GDP, with a large share for roads, railways and defence |
| Fiscal consolidation | Fiscal deficit fell from 9.2% of GDP (2020-21) to 4.4% (2025-26) and is budgeted at 4.3% for 2026-27 |
| Debt anchor | Move to a debt-to-GDP target of 50% (plus or minus 1) by 2030-31 |
| Transparency | Off-budget borrowing (such as food subsidy through FCI loans from the National Small Savings Fund) brought onto the budget from 2021-22 |
| Tax reforms | Lower corporate tax rates (2019), new personal income tax regime as default (2023), income tax relief so that income up to ₹12 lakh is tax-free under the new regime (2025-26), the Income-tax Act, 2025, and GST rate rationalisation in 2025 |
| Rising transfers to states | Interest-free capital loans and higher devolution |
| Interest burden | Interest payments take a large share (over a third) of revenue receipts, which limits room for other spending |
| Welfare and inclusion | Large spending on food subsidy, housing, rural employment, health insurance and direct transfers |
Fiscal federalism
The Finance Commission, set up every five years under Article 280, recommends the share of central taxes that goes to states (vertical devolution) and how it is divided among them (horizontal devolution). The Fifteenth Finance Commission recommended 41% for 2021-26. The Sixteenth Finance Commission, chaired by Arvind Panagariya, made recommendations for 2026-27 to 2030-31. Cesses and surcharges are not shared with states, which states have criticised as their share in the centre's gross tax revenue has grown.
Challenges
- High public debt and interest payments limit room to spend on development.
- Dependence on uncertain receipts such as disinvestment and RBI dividends.
- The quality of spending: subsidies and revenue spending remain large.
- Off-budget liabilities of public sector bodies and states.
- Rising expenditure needs for defence, climate and social sectors.
- Tension with states over cesses, surcharges and conditions on transfers.
Way forward
- Stick to the debt anchor with a credible medium-term path.
- Raise the tax-to-GDP ratio by widening the base rather than raising rates.
- Improve the quality of spending through outcome budgeting and better targeting of subsidies.
- Keep capital spending high while encouraging private investment.
- Strengthen state finances and coordination through the GST Council and the Finance Commission.
- Consider an independent fiscal council to assess forecasts and compliance, as the N. K. Singh Committee suggested.
Possible exam and interview questions
- Explain the different concepts of deficit used in the Union Budget. Why is the fiscal deficit considered the most important? (620 words)
- Why has India moved from a fiscal deficit target to a debt-to-GDP anchor? What are the merits of this approach? (420 words)
- Distinguish between the Consolidated Fund, the Contingency Fund and the Public Account of India.
- What is the difference between revenue and capital expenditure? Why is the share of capital expenditure watched closely?
- Interview: Should India set up an independent fiscal council?
Related reading: taxation and GST, Economic Survey and Union Budget, and fiscal policy.
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